- quote -

This depends on the person.

My logic is how many intermediate term financial issues does one fund
each month. Intermediate term being any period which is less than 15
years.

Think of all the expenses you occur once every 15 years:

1) 1-2 cars (estimate $4000/year??)
2) house repairs (estimate $1000-$5000/year??)- roof, HVAC, driveway,
landscaping, additions, remodels...
3) college education for kids ($60,000)
4) wedding for daughter ($20,000)
5) large family vacation ($20,000)
6) whatever else for personal needs

My premise was if I funded only 1-2 of these per year, it would take
forever to get the cash needed for some of the larger items. But if I
created a "general fund" and budgeted that, the big things which occur
less often (cars, wedding, college) would clearly be a bigger chunk of
the general fund than the house repairs. If all money is in same
spot, and investment is relatively moderate in risk, the biggest risk
is the 2-4 years it takes to START this. Once started, this general
fund should have enough to
a) compound and get the big items with less cash put up by me
b) have a place in budget for smaller expenses- just stop the deposits
the month the house needs repair, or the year the landscaping gets
done (and pay cash for it).

All this money has same time horizon (more or less). The difference
is the magnitude of the amounts needed to fund the goal.

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On May 12, 4:15*am, jdbs...[at]gmail.com wrote:

- quote -

I feel that it can worth it to increase your risk to get a higher
yield. But, the odds should be in your favor.

- quote -

If you only need $80,000 for emergencies, then you can put $20,000 in
whatever investment vehicle you want.

Or, you can invest the $100,000 in an investment vehicle that is
extremely unlikely to go below $80,000.

- quote -

Your emergency fund only needs to be in liquid investments as long as
the risk is limited.

- quote -

Yes to your comments. And, people should be able to tolerate more risk
as they become wealthier.

Financial planners are first going to examine the needs of clients
that can't tolerate risk because a tragic investment can ruin a
person's life.

--
Ron

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On May 9, 5:04*pm, jdbs...[at]gmail.com wrote:
- quote -

If I knew I needed money in 3-5 years, I would be mostly cash for that
need within 2 years. A formula to think about, for every 1 year the
money is invested, you can be 10% equities. So if you need money in 5
years, a 50-50 stock/bond split makes sense. 3 years is 30-70 stocks/
bonds, 10 years could be 100% equites, 0 years should be 100% cash or
bonds.

The key to this is sell 10% of equity position each year as the time
horizon reduces.

Here is the logic I use for my budget:
1) I have 3 months expenses in CDs (90 day CDs).
2) I have a months expenses in my checking accounts at any time (so
April 1 paycheck is paying bills for May 1).
3) Any deposit to an IRA is done around the 23rd of the month- so the
money is in the account most of the month if needed for an emergency.
This is close to 1/2 of months expenses.

I have extra money to save/invest each month/year (from a second
job). I also budget for large, non recurring expenses (like new HVAC,
new hot water heater, new car, kids education) even though those
expenses might only occur once every 10-15 years. There are two
issues with this:
1) I do not know when those expenses will occur in some respects.
2) If I did not budget for them, it might be a tough year if 3 of
those things occured within any 15 month period. Liquidity is
important, but not at expense (to me) of waiting for the expenses to
happen. Maybe time teaches me a lesson, my intent is to include these
large expenses in the budget so when they occur I have the money.

So each month I have around $150 I can contribute to these bills (and
it will increase once my current cars are paid off). I could put this
$1800 each year into cash, pay down the mortgage or do something else
with the $1800, but then if I look at the returns over a 5-10-15 year
period I would have probably lost purchasing power or reduced my
liquidity.

So I choose to invest in PRPFX in a taxable account. I can tap this
if I need to. It does fluctuate 1% per day sometimes, but overall
that fund is better than cash, and more stable than most stock/bond
portfolios (year over year).

If I knew I needed a new hot water heater, cost might be $2000 or
$700. Not sure. I budgeted $2000 every 15 years (so $2000/[15*12]=
$11/month). I would stop the $150 deposits and try to pay cash if I
saw the expense coming. If it was a new HVAC, might be $5000 every 20
years ($5000/240=$21/month). Again if I saw expense coming, I would
stop the deposits and raise cash.

In addition if these expenses do not occur, I am also using same
account for kids education funds. So my kids might be able to get
more for school if these random expenses do not occur as scheduled.

Then at right time I would sell shares of PRPFX to replenish the
cash. Maybe not reinvest dividends for a year or two and use that to
replenish in addition to skipping deposits.

I want
1) flexibility
2) low taxes on investment
3) liquidity

If I had to think of 3 funds which fit the category, I would look at
PRPFX, RPSIX or Vanguard Wellesley (not sure of ticker) as a stable/
moderate risk fund for expenses with a time horizon of longer than 7
years.

The tax consequences of the last two are much worse than PRPFX though.

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jdbst56[at]gmail.com writes:

[Vanguad Short-Term Investment Grade Bond fund]
- quote -

Nope. It's all (almost all) corporate debt - bond issued by
companies, not governments, and thereby the income is taxable
at both federal and state levels at your regular marginal
income tax rate.

Vanguard does have a short-term bond index fund which is
about half corporate and half government debt - some (but not all)
of that one's income would be exempt from state income taxes.

In both cases, cap gains are taxable regardless.

- quote -

At the point where you can say "well, I didn't really need all
that money that soon anyway, and can live with some short- to mid-
term losses along the way".

Suppose you had a "buy a new car fund" and you planned on buying
some particular car in 5 years. Unless you can either live with
waiting a few more years, or accepting the possibility that you'll
have to get a less expensive car, you need to invest that money
more conservatively. If you're willing to risk the Hyundai for
the chance that you'll get a Lexus instead of guaranteeing
yourself a Honda, it may be worth taking your chances. Only
you can decide.


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jdbst56[at]gmail.com writes:

- quote -

No, it's the other way around: US government bonds are exempt from state
tax, but you still have to pay the feds. (A national short muni bond fund
would be exempt from federal tax but you'd still pay state tax.)

- quote -

I think a large part of it is how much you have in the way of other
assets. If your $25K emergency fund is all you have, you probably
don't want to take any chances with it. If you have $250K in your
taxable investment account and your mortgage is paid off, losing
perhaps a few hundred dollars of pricipal if you have to tap into your
bond fund in an emergency seems like not such a big deal. If you're a
multimillionaire, you may figure, why take risks at all? and swing
back to keeping all your money in only the safest of investments.

-Sandra the cynic

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- quote -

I assume that a fund like VFSTX would be exempt from federal tax but
not state tax (PA tax is 3.07%)?

It seems to me that the general consensus says that it is not worth it
to try to squeeze an additional 1-2% at the risk of principal loss.
For the sake of argument, at what point is it worth it? Maybe it
never is? If one had 100k in liquid savings, would the risk be
warranted to invest the "non-emergency" portion of those savings in an
effort beat the normal CD/savings return by using a bond fund or
similar? Obviously there is a price to be paid for liquidity, and a
true emergency should be kept in a low risk, liquid savings account.
There is also a risk in trying to increase yield. But, is there not a
risk in failing to capitalize on your non-emergency cash flow? For
example, if inflation is at 4%, and one invests non-emergency cash in
a CD or savings account that is earning around the same minus taxes,
that person is losing money, no? I suppose the answer to this would
be to invest in long term instruments like 401ks, IRAs, etc. However,
maybe the point of this cash is for a rainy day type fund that isn't
necessarily emergency but not retirement either. I suppose the cost
to benefit ratio really isn't in favor of a mid term investment of
this type, and probably accounts for the fact that many people only
view investments in terms of short term emergency savings and
retirement.

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BreadWithSpam[at]fractious.net writes:

- quote -

Of course, one can't really "load up" on savings bonds
any more, even if the rates were favorable, now that the
annual purchase limit was reduced from $30K to $5K.

--
Rich Carreiro rlc-news[at]rlcarr.com

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anoop <ghanwani[at]gmail.com> writes:

- quote -

Only because inflation has kicked up for the moment.

US Treasury Series I bonds are paying the lowest fixed-rate
since they were introduced. Since the first of this month,
the fixed rate portion of I-bond interest is now ZERO percent.

The current overall earnings rate is an annualized 4.84% -
a combination of the ZERO fixed rate and the inflation
rate as measured by the CPI-U.

Six months from now, that inflation portion may go down,
but any I bonds purchased now will keep their zero fixed
rate.

By comparison, when they were first introduced, the fixed
portion started at about 3%. Folks who bought them anytime
from '98 to 2000 are earning as much as 8+% now, given the
currently high inflation and fixed rate portions of 3.3 to
3.6%.

I'm not sure I'd want to lock in that zero percent fixed
rate, even with the (temporary) nominal 4.84% rate. If
one does want that inflation protection, it may be worth
putting the I-bonds off until November (or later) when
(hopefully) the gov't will give a more generous fixed rate.
In the meantime, the money may be parked in 6-month CDs
or in funds invested in short-term bonds.

Here's the info on historical rates on the I-bonds:
<http://www.treasurydirect.gov/indiv/...esandterms.htm
In fact, in general, in response to the OP's original
question, a short or short-mid term investment grade bond
fund might be just what he's looking for anyway.

By way of example, the Vanguard short-term investment grade
bond fund is currently yielding 4.87%, is rated 5 stars by
MStar, and hasn't had a negative year in at least 10 years,
has only had two negative quarters in that time, and has had
a 10 year annualized total return of nearly 5%. (in '94,
it actually had a total return of -0.08%, the only down year
since it started, and that was sandwiched between two years
of +12.74% and +7.07%). That fund is VFSTX.

For a taxable account, there are very similarly good short
to mid term muni bond fund worth looking at, too, especially
for folks in high tax brackets and in high tax states.

These will all likely do better than CDs or I bonds, at
least over periods of more than a couple of years, with vastly
less risk than even the most conservative equity funds.

If anyone out there was lucky/smart enough to load up on
I-bonds in 98-00, hang on to those! I bought some and wish
I'd bought a lot more. Of course, it was very hard to
convince people to buy such conservative things during that
particular period of time, give what was happening in certain
very well advertised parts of the stock market...

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On May 9, 2:04 pm, jdbs...[at]gmail.com wrote:
- quote -

If you are certain you won't need the money for 5 years,
you can look at buying I-bonds. The rate right now is
not that great, but is probably better than CDs. As an
added bonus the interest may be tax-deferred until the
bonds are cashed and is not subject to state income tax.
Also, there are some cases where the interest can be
completely tax-free if the bonds are used for education
and the AGI is within certain set limits for the year
in which they are redeemed.

- quote -

I don't think you're leaving money on the table. You are
leaving the potential for greater reward along with the
accompanying risk. There is nothing wrong with sitting
in safe investments for money that you might need 5 years
down the road if that is what helps you sleep better at night.

Anoop

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- quote -

Combined income for 2007 was 105k. Taxable income was 83k.

Thanks

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jdbst56[at]gmail.com writes:

- quote -

Well, if I lived in PA, I'd have my bond allocation in VPAIX instead
of VMATX. :-)

Re AMT, see Vanguard's web site:

https://personal.vanguard.com/us/pla...nfoContent.jsp

"Most Vanguard municipal bond fund managers sought to limit their
funds' investment in private-activity bonds in 2006 and 2007. However,
the funds are not, and likely will not, be completely AMT-free. By
prospectus, Vanguard municipal funds may invest up to 20% of assets in
private-activity bonds."

I know there are national muni bond funds that are AMT-free by prospectus
but it may be harder to find one specific to a given state. The Vanguard
funds have the advantage of very low fees, at least.

-Sandra the cynic

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<jdbst56[at]gmail.com> wrote in message
news:0249a1a6-4e66-43f2-95c8-2dfa02b4c641[at]d1g2000hsg.googlegroups.com...
- quote -

Well, 1% of $10k is $100. I can't say that $100 is worth it to you to accept
some greater risk (risk that you'll lose money just when you can ill afford
it), but it wouldn't be to me.

Elizabeth Richardson

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Sandra Loosemore <noreply[at]frogsonice.com> wrote:

- quote -

This is a good suggestion. But we don't know the original poster's
marginal rate. Assuming he pays enough taxes to benefit from the tax
exemption, another investment that's more aggressive than cash but less
so than equities is a closed end munibond fund. I own BYM, which yields
more than five percent at its current price. Beware, however, that most
closed end funds use leverage and that adds volatility that you don't
get with an unleveraged, open-end munibond fund.

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- quote -

Thanks, my intent was not to move the entire 40k. That's why in my
initial post I said "consider moving a portion" of the 40k, perhaps
5-10k. Also when I mentioned car fund, I meant purchasing another car
in the future which I do not anticipate for several years. Both of my
vehicles right now are relatively new with one of them still under
warranty. I agree with your assessment that it would be foolish to
move a large majority of my "emergency fund" into a volatile
investment. My thinking here though is I can afford to take some risk
on a portion of those funds for the increased return. The fact that
the entire 40k is sitting in a savings account is really because of
convenience, not because I felt a need for 40k in an "emergency fund".
But I'm open to the opinions of the group. Maybe I shouldn't try to
get too greedy and just leave it all in the safe investment?

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- quote -

Thanks for the insight. Since I live in PA, I suppose I should look
at something that would avoid state income tax. What's your thoughts
on VPAIX? Also, these funds that we are discussing right now are not
subject to AMT, correct?

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On May 9, 4:04*pm, jdbs...[at]gmail.com wrote:
- quote -

Based on your posts, I would not consider most of your $40k to be
"midterm". You could need the "emergency" fund tomorrow, right? Is it
the same story for the "car" fund? Is there a risk that your
transmission could go out 6 months from now and cost $1500? Are you
under warranty for the next 5 years? It sounds like the only part of
your fund that is truly "midterm" MIGHT be the home improvement
portion.

I'm all for making my dollars work as hard as possible, but remember
that emergency funds aren't about the highest return but rather the
lowest volatility. Admittedly, I don't know the specifics of your
situation, but I suggest you move no more than the amount you are
POSITIVE you will not need in the near future. IMO, squeezing out an
extra 1 or 2 percent just isn't worth the potential principal loss.

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Ron Peterson <ron[at]shell.core.com> writes:

- quote -

OP said 3-5 year time horizon.... I don't think equities, especially
individual stocks, are an appropriate investment for that short of a period.

I suggest the OP look at muni bond funds, which are an exceptionally good
deal right now. VMATX is currently yielding 4.19%; since that's exempt
from both federal (28%) and state (5.3%) tax for me, that's equivalent to
a 6.28% taxable yield.

-Sandra the cynic

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On May 9, 4:04*pm, jdbs...[at]gmail.com wrote:

- quote -

Utility stocks or funds that specialize in them would probably have a
lower risk of severe loss, but still have a reasonable return. Oil and
gas pipeline stocks would also fall in that category.

--
Ron

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I know the majority of the discussion in this group is about short
term (emergency savings) or long term (retirement) investing. Are
there any recommendations for investing on a mid term horizon, maybe 3
to 5 years? My wife and I both contribute well over matching to our
401ks. We've maxed out our roth for 2008. We have 40k which is our
emergency/home improvement/car fund in a high interest savings account
earning 4%.

After reading a few of Jim's posts, I started to wonder if I should
consider moving a portion of that money into a moderate mutual fund of
some type. Something that is relatively low volatility while still
being worthwhile by beating my 4% rate. The added benefit is it still
being liquid so that I could tap it "just in case". Would this be a
viable strategy? If so, are there any funds that I should take a look
at? I know that Jim was using PRPFX. Also, since the investment would
be held in a non-retirement account, I assume there are some tax
implications in play?

While I understand cds and savings accounts are safe investments, I
feel like I might be leaving some money on the table. I like the idea
of keeping enough for my actual emergency fund in the safe online
investment while having the opportunity to earn a little bit more than
the standard short term instruments. Your advice is appreciated.

Josh

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